Callide outage feeds 60pc power price surge

Last month’s explosion at Queensland’s Callide power station and gains in gas prices have given a huge boost to depressed wholesale power prices and fuelled suspicions among some industrial users that generators are taking advantage to reap super profits.
  1. Last month’s explosion at Queensland’s Callide power station and gains in gas prices have given a huge boost to depressed wholesale power prices and fuelled suspicions among some industrial users that generators are taking advantage to reap super profits.

    Average prices across the four major states in the National Electricity Market surged more than 60 per cent in May to $86 a megawatt-hour, more than double the price 12 months earlier, according to JPMorgan.

    Forward prices have also turned northwards, reversing the trend that drove profit downgrades at both AGL Energy and Origin Energy over the past few months.

    The rising prices cannot be wholly attributed to the fire that took down the Callide power station on May 25 given the gains started well before that, JPMorgan analyst Mark Busuttil said, while adding that the issues at Callide “highlight the fragility of ageing baseload plants”.

    Still, the Callide outage has contributed to “elevated” prices over the past weeks, said Josh Stabler at adviser Energy Edge, who pointed to a 21-day average of $176/MWh in NSW compared to the annual average of $56.90.

    Price spikes in NSW wholesale prices caused one energy-intensive business to point to a 14-hour period where generators would on paper have banked $324 million in gains.

    But energy market experts point out that by far the majority of power is covered by contracts and hedges with perhaps only 10-20 per cent traded on the spot market.

    “There would be some merchant capacity that have done well out of the recent volatility,” said Dylan McConnell at The University of Melbourne’s Climate & Energy College.

    “[But] only unhedged uncontracted or merchant capacity would be receiving those spot prices.”

    Federal Energy Minister Angus Taylor said recent events had justified the government’s $600 million investment in a new gas-fired power station in the Hunter Valley to boost supply.

    He added that its “big stick” laws would also hold energy companies to account to ensure prices were competitive.

    “The events of the last few weeks demonstrate why it’s also vital that we get new dispatchable supply into the market to increase competition and supply and put downward pressure on prices,” he said.

    “This is why the government is prioritising work on a fit for purpose market design that will help provide the strong investment signals required to get that reliable supply into the market and deliver affordable power for Australian families and businesses.”

    Mr Stabler also took issue with suggestions of “super-profits” and pointed out that the price bounce was off five-year lows at the beginning of April.

    “The market is currently in a vulnerable state with the unexpected outages of Callide B and C combined with a lower online generation capacity after a very quiet summer,” he said.

    CS Energy and InterGen, the joint owners of the Callide generator, have committed to replacing the damaged unit 4, despite calls from anti fossil fuel groups for it to be left idle.

    Callide C is the newest baseload coal plant in the NEM, having started generating in 2001, and is expected to be out of action for up to 12 months.

    But Mr Stabler noted that Toshiba, the maker of the coal-fired steam turbine at Callide C, had stated it was discontinuing the production of coal-fired steam turbines, closing its order book in November.

    “Therefore, the timing is becoming critical to the ability to acquire a new steam turbine given the extensive existing damage,” he said.

    Credit ratings agency Moody’s has placed InterGen’s ratings under review for a possible downgrade because of the fire, which it said “severely damaged” two units.

    It said the review also takes into account the imminent maturing this month of $212 million of project finance debt at InterGen’s separate minority-owned generator in Queensland, the Millmerran plant, which has not yet been refinanced and will need to be partly paid down.

    “The review for downgrade reflects uncertainty around future profitability of the Callide C project, which has largely unlevered cash flow and has accounted for around 10 per cent of InterGen’s proportionally consolidated EBITDA in recent years,” Moody’s said.

    The firm also pointed to “elevated carbon transition risk” for coal power generators given increasing downward pressure on output and prices from renewable generation, while Queensland’s climate transition strategy calls for a 30 per cent cut in CO2 emissions by 2030 from 2005 levels, including 50 per cent renewables generation.

    Separately, CS Energy has appointed Dr Sean Brady to conduct an independent investigation of the catastrophic failure of the Callide C power station last month.

    Dr Brady conducted the inquiry into the mine explosion at Anglo American’s underground coal mine in 2020.

    CS Energy and InterGen have committed to replacing the unit 4 at Callide C power station, but are hoping it will be covered by insurers who are also investigating the rare explosion of the turbine which triggered a state-wide blackout last month.

    Source: Financial Review